Skepticism on Google IPO emerges as auction nears

Google Inc., the search engine giant whose first stock offering supposedly augurs a rebound for the technology economy and a rare opportunity for the small investor, may turn out to be neither.

Some analysts fear that Google is taking too large a gamble in setting the price of its first public offering of stock so high and selling it auction style - registration for which is expected to close as soon as today. The auction will begin this month.

"We think this is a formula for a financial train wreck," said David Menlow, president of IPOfinancial.com, a New Jersey investment research firm. "I believe that with the high price that they've set this at ... the company and its selling shareholders will have received the maximum dollars possible at the expense of the new investor."

The estimated share price between $108 and $135 and a five-share minimum bid might preclude many individuals from buying in, even though the auction arrangement was supposed to allow access to atypical participants in initial public offerings, who are often left out in favor of select groups of investors.

And even big investors are hesitating, some say. They might be bitter from losing their preferred status and having to participate in an auction and worried that the stock will sink after the initial offering if employees and insiders sell their shares quickly for big profits.

The Mountain View, Calif., company is offering 9 percent of its stock - about 24.6 million shares - in the IPO, holding most of it back.

"Basically everyone expects and probably even hopes that this thing starts heading south," said analyst Gene Walton of Walton Holdings in New York. "I can't think of anyone real positive about it. The institutions hate it, but the individual hates it, too."

Google had other worries this week. It may have illegally issued 23 million shares of stock to employees and several others in 18 states, including Maryland, and the District of Columbia without notifying government regulators, says a document filed with the Securities and Exchange Commission on Wednesday. The mistake could set the company up for lawsuits, which also could dissuade investors.

In the filing, Google said it offered to buy back with interest 23.2 million shares of stock sold to 1,105 employees, along with another 5.6 million stock options held by 301 people, because the company neglected to properly register the shares under federal and state securities laws.

Google representatives said they couldn't comment because of a mandatory quiet period leading up to the stock offering. Analysts said they didn't expect the disclosure to have much effect on the IPO or Google.

The company's cash reserves of about $549 million will be enough to cover the buyback, which could cost as much as $25.9 million if everyone takes it, though that's unlikely. The company gave a September deadline for the offer, and shareholders will likely wait out the auction to see which is the better deal, Menlow said.

"They get very high marks from me in making this offer of rescission," he said. "That's really about doing the right thing and not taking any chances."

In an SEC filing late last month, Google outlined the IPO process. At the estimated share price, the company would gain a market capitalization value of about $36 billion, equal to competitor Yahoo Inc., whose stock price closed down $1.11 yesterday at $26.80.

Yahoo, which used Google search technology on its Web site, provided about 3 percent of Google's earnings last year, and 2 percent this year before an agreement between the companies expired last month.

To participate, prospective shareholders must have a brokerage account at one of 35 firms and obtain a "bidder ID" online from www.ipo.google. com. The site opened a week ago, and according to Google's prospectus, "may only be open for obtaining bidder IDs for approximately one week," which passed yesterday.

The underwriters will analyze the bids, and choose the highest number at which they can sell the most shares, which is risky to the company.

"Our stock price could decline rapidly and significantly," the Google IPO prospectus said. The high price could be dangerous as well, even if there are buyers willing to pay it.

"Successful bidders may conclude that they paid too much and could seek to immediately sell their shares to limit their losses," the filing read.

Some wonder how many buyers will bite.

"If the stock went down a hundred points tomorrow, I'd probably buy some, but we're talking about a very high valuation," said Douglas Christopher, an analyst with Crowell, Weedon & Co. in Los Angeles. "I would just say 'buyer beware.'"

"Google is not a conventional company. We do not intend to become one," Page wrote, stressing that the company will take a long-term focus even if it means short-term sacrifices. "Our long-term focus does have risks. Markets may have trouble evaluating long-term value, thus potentially reducing the value of our company. Our long-term focus may simply be the wrong business strategy. Competitors may be rewarded for short-term tactics and grow stronger as a result. As potential investors, you should consider the risks around our long-term focus."

Matthew Crowder, a salesman for a New Mexico Internet service provider, set up a Web site last fall in anticipation of the Google IPO (www.google-ipo. com). It has since drawn about 1,100 registered users and gets about 10,000 hits a day.

"Since they announced the price range, a lot more people have expressed negative thoughts about it, geared toward the per share price," Crowder said yesterday. Message board posts call the figures "way too high," "not worth the investment," "inflated," "lofty."

"It's something people have become hung up on, the valuation itself," said Crowder, a self-professed Google fan. "They've expressed concerns or skepticism about [Google's] current business model, which I think is personally kind of shortsighted. I'm sure with all the Ph.D.s Google has, it's planning a lot bigger products than what we currently see that could be very promising."

All the debate swirling about the most talked-about IPO since the dot-com bubble of the late 1990s is "just noise," Walton said.

"Everything that's out there is just speculation," the New York analyst said. "We don't know what Google's going to do, and we won't know until it goes public."